Subleasing

When you are the lessee, you may want to make sure you can sublease extra space you have.  The lease should contain provisions addressing whether you can sublease, whether you have to get landlord approval for a sublease, and other relevant terms.

Many times, a commercial lease will require that the lessee require the sublease to incorporate the lease terms and conditions.  Sometimes, the landlord will require that the sublessee go through a process for approval as a sublessee such as submitting financial information to the landlord as a part of the landlord’s approval process of any sublease.  Another issue that can be important to realize is that the generally, a landlord does not want to lease space wholesale so that lessee’s are able to make money off the leased space which the landlord might otherwise be able to earn directly if they leased the space to the sublessee.  Accordingly, a landlord’s lease may require that any extra rent paid by a sublessee, above and beyond what the lessee has to pay for the space, be paid by the lessee to the landlord.

What is important to remember, no matter the sublease terms, is that the lessee will remain subject to the lease regardless of what the sublease says. The sublease does not modify the lease.  In short, a lessee needs to make sure that the sublease is sustainable, does not violate the lease, and is financially beneficial to the lessee.  For example, the lessee should make sure the sublease term is equal to, or shorter than, the lease because they cannot make any promises to use space they do not have a right to use.

If you are a sublessee, you need to make sure that you get a copy of the lease.  The sublessee must realize that the lease is the document that creates the context within which the sublease will operate.  The sublease is going to be dependent on the relationship between the landlord and tenant.  Usually, a sophisticated lessee will put in the sublease that that sublessee is obligated to follow the terms and conditions of the lease.  But even if it does not, violations of the lease by the sublessee can create significant problems, both for the lessee and the sublessee.  The sublessee may have some rights against the lessee if it is the lessee’s fault, but regardless, the sublessee may still be kicked out of the space they were depending upon.

Remember that other terms of the lease may also come into play.  For example, the management costs of the landlord may be passed on to the lessee.  A question to consider is how the lessee should, if they can, pass a proportional share on to the sublessee.

If the Landlord must approve the sublease, look out for terms that may require the lessee to reimburse the landlord for such costs.

Finally, when a lessee is interested in subleasing, the lessee may be in competition with the landlord who is leasing other space in the facility.  The lease may have terms that prohibit, or limit, the ability of the tenant to advertise the space.  The lease may also require the tenant to sublease space at less than the amount the landlord is leasing space.

Commercial Leases: Other Clauses—Part 2, 8 Clauses to Think About and/or Include

Continuing the discussion of additional clauses from last week, here are eight more provision that should be addressed in a Commercial Lease.

Security Deposit

Often, a landlord will require a security deposit as a part of the lease.  The provision can have a lot of variable or contingencies.  For one, the amount can be negotiated or even excluded if the tenant can provide sufficient evidence of their financial stability or resources.  Additionally, the clause can potentially require that any security deposit be held by the landlord separate from other funds.  The clause should address how and when the deposit is returned at the end of the lease.  The landlord will generally require that they have the ability to deduct from the security deposit any costs of repair or unpaid fees or rent.  The lease should also address whether the deposit accrues interest, of if the landlord gets to keep the interest.  Each of these variable should be addressed in the lease to clarify exactly how the deposit is to be handled.  In Colorado, commercial security deposits are not subject to many legal restrictions like residential deposits.  Rather, the handling of the deposit is essentially up to the negotiations of the commercial parties.

Use

The lease should state what the property can be used for.  Tenants will want less restrictions while landlords will want to narrow the scope.  Use can have an impact on many other parts of a lease.  It could also impact the ability of the tenant to expand.

Occupancy and Commencement

Occupancy and commencement are different.  Occupancy means when the tenant can get into the space to put in furniture, computers and the like.  Commencement is when the rent starts to come due.  The tenant wants the commencement date to occur when it is open for business.  It is important for the tenant to be able to terminate the lease if the commencement date is delayed for an unreasonable amount of time after it is planned.

Tenant Improvements

Tenant improvements are modifications or changes to the space at the landlord’s cost which accommodate the space to the needs of the business.  Tenant improvements can be a source of cost overruns and problems.  The tenant wants to make sure that the improvements are done timely and to the tenant’s specifications.  The tenant should be very specific and clear about their specifications.  A landlord will want to minimize the cost and require the tenant to pay for cost overruns that might occur.  The lease provides a place for the parties to carefully negotiate this issue to the satisfaction of both parties.  The lease should state that the tenant’s acceptance of the lease is contingent on the satisfactory completion of the tenant improvements to the mutually agreed upon specifications, as well as the clean up of the work done.  The lease should also state that the landlord will pay for the improvements, how such payments are to be made, and who has authority to make changes to the plans.  The tenant should keep an eye out for administrative fees and unclear terms.

Building Services

The lease should specify what the landlord will provide in the way of building services and landscaping.  This should include heating, air conditioning, electricity, and wiring, as well as snow and ice removal.  A tenant should determine the cost for these items, including after hour rates.

Americans with Disabilities Act

The lease should state that the property is in compliance with the Americans with Disabilities Act (“ADA”).  If it is not, the landlord can try to pass the costs of coming into compliance on to the tenant.  The tenant will want to include a provision that ensures that costs incurred to comply with the ADA are born solely by the landlord.

Signage

The tenant will want to find out what kind of signs they can put up, size requirements or limitations, and location restrictions. Tenants will want to make sure that they can be listed in directories without an additional charge.  Tenants will also want to find out who bears the cost of signs which are allowed.

Relocation

Often, leases will include a provision that allows the landlord to require that the tenant move their location to a similar space in the property during the term of the lease.  Tenants will want to make sure that the landlord bears the costs of any move the tenant has to make including moving expenses, changes in stationary, signs, business cards and the like.  A tenant should also specifically consider making sure that the cost of rent for any new space is the same during the remaining term of the lease, making sure that any unique costs for moving are covered by the landlord, including a term that gives the tenant sufficient time to evaluate the move with a potential right to refuse to move or terminate the lease, and including a provision that limits when during the term the landlord can require a move.

These are not all of the clauses in a lease.  There are many more, and many can be interrelated.  Take time to read the lease and to consider the contingencies, and to negotiate the lease.  The assistance of an attorney can be invaluable in this process.